Simons Trading Research

Author: simonsg   |   Latest post: Thu, 20 Sep 2018, 09:55 AM


Frasers Commercial Trust - Like A Fixed Deposit

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  • 55 Market Street sold at 1.7% exit yield, likely the lowest yield ever for a Singapore office building.
  • Proforma NAV to jump to S$1.70 per unit.
  • In a strong position to recycle proceeds into higher yielding properties and accelerate DPU growth profile.
  • Maintain BUY, Target Price of S$1.65.

What’s New

Disposal of 55 Market Street at 45% above the latest valuation

Frasers Commercial Trust (FCOT) announced that it has entered into an agreement for the sale of 55 Market Street for S$216.8m which is at a 44.5% premium above the valuation of S$150m as at 1 July 2018 and almost three times its purchase price of S$72.5m in 2006.

The buyer was not disclosed but we understand it is a fund.

The sale consideration is equivalent to S$3,020 psf based on the building’s net lettable area of 71,796 sqft and translates to an exit yield of 1.7% (based on annualised 2Q18 net property income (NPI)) which is likely to be a record low yield for a Singapore office building.

FCOT in its press release noted that 55 Market Street is the REIT’s smallest asset and is non-core. By unlocking value, the REIT has an opportunity to recycle capital into higher yield investments and pursue other growth initiatives.

55 Market Street overview

55 Market Street is a 16-storey commercial property located in Raffles Place, consisting of 15 floors of office space and two floors of retail space on the ground floor and basement level.

Committed occupancy as at 31 March 2018 was 87.9%. The property represented 6.3% of FCOT’s overall portfolio by value and contributed 3.5% of FCOT’s 2Q18 NPI.

The property sits on a 999-year leasehold title commencing from April 1826.

Financial impact – lower gearing and DPU accretive transaction

FCOT expects to book a net gain of approximately S$76.5m based on its valuation of S$139m as at 30 September 2017.

The transaction is expected to be completed by 31 August 2018 with proceeds from the divestment used to repay existing debt. FCOT’s aggregate proforma leverage is expected to fall from 34.7% to 26.5%.

In addition, proforma NAV per unit is expected to increase from S$1.60 to S$1.70.

Based on FCOT’s estimates, the transaction is also 3.7% DPU accretive, with proforma FY17 DPU increasing from 9.82 Scts to 10.18 Scts.

Our Thoughts on FCOT

We are delighted that Frasers Commercial Trust (FCOT) has been able to achieve a good price for 55 Market Street and in our view, places the REIT is a very strong position to accelerate its growth plans. This transaction follows the good prices achieved over the past few weeks for office assets in Singapore. These include the sale of Twenty Anson on 2.7% exit yield and potential disposal of Manulife Centre on a mid-2% exit yield.

FCOT is now in a strong position to recycle the proceeds into the higher yielding UK business park space, which it expanded into with a maiden acquisition of a 50% interest in Farnborough Business Park in late 2017 on a low 6% NPI yield. This should help temper the loss of income from HP vacating its space at ATP but more importantly accelerate FCOT’s DPU growth profile going forward.

Furthermore, we believe the market should react positively to this announcement as proforma NAV per unit now jumps to S$1.70 which is significantly above FCOT’s last traded price of S$1.39.

With FCOT demonstrating that it does not fall in love with its assets and is willing to sell its properties at the right price, combined with leverage to the expected multi-year upturn in the Singapore office market, we maintain our BUY call with a Target Price of S$1.65.

Source: DBS Research - 11 Jul 2018

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